Sharp decline on oil again impacting sentiment

Market Overview

The recovery of risk appetite seems to be over almost before it had begun as once more the movement in the price of oil is driving general market sentiment. After 9% gains on oil on Friday, a significant portion of this move was retraced yesterday amid news of record output from Iraq and no sign of any slowdown of investment in Saudi Arabia. The sharp decline in oil is impacting market sentiment, dragging equity markets lower, and pushing traders back into safe haven plays such as US Treasuries, the Japanese yen and has driven a breakout on gold. Volatility remains a significant feature of market moves once more and there has to be a very real concern that the lows we saw in some markets in the middle of last week could easily be retested. Oil is once more back below the psychological $30 mark and this is not being taken well.

Wall Street closed sharply lower with the S&PP 500 down 1.6%, whilst Asian markets were weaker across the board with the Nikkei down 2.4% and European markets are under pressure once more this morning. Forex trading is again showing the dichotomy between safe haven plays being supported (euro and yen), whilst the commodity currencies (Aussie, Kiwi and Loonie) are all weaker. Gold is finally looking to break through the resistance and is benefiting from the safe haven preference. The oil price is around 3% weaker and continuing to deteriorate.

Traders will have to wait until this afternoon for some direction from the economic announcements, with the Case-Shiller House Prices growth at 1400GMT with 5.7% growth expected for the year. US Consumer Confidence is at 1500GMT with expectation of a flat reading of 96.5. Finally, the Richmond Fed Manufacturing index, also at 1500GMT will also be keenly watched after the disastrous Dallas Fed reading yesterday. Expectation for Richmond is for +3 (down from +6), a negative reading would not be welcomed.

Chart of the Day – USD/CHF

The creep higher for the dollar continues as the series of higher lows has seen the pair break to another 7 week high on its way back towards a test of the November high at 1.0330. The pair continues to trade in a longer term uptrend channel, whilst there is a steeper uptrend which has been supporting the lows since August, currently coming in at 0.9930, something which is also flanked by the support of the rising 89 day moving average. Momentum indicators remain positive with the Stochastics pulling strongly as Friday’s breakout above 1.0125 was seen. Continue to look upon corrections as chances to buy, with a great buy zone now in the 0.9950/1.0000 support band. The intraday hourly chart shows sooner support though around 1.0080. As the rally continues there is minor resistance around 1.0220 as a late November pivot, but there is little real resistance until 1.0330. The bears would not resume control now until 0.9875.

EUR/USD

It would appear that the euro is not ready to break down again as the support around the old medium term floor has held up. The pivot around $1.0810 may have been marginally breached but certainly not decisively and subsequently the buyers have come in to support the euro. Whilst other major currencies are being thrown around by the volatility, the euro subsequently remains rather calm and lacking direction. The momentum indicators have a minor corrective bias but it would appear that the general risk appetite in the market is waning again and this should favour the euro. Leaving support at $1.0787, a creep higher is testing the initial resistance at $1.0860, with $1.0900 overhead. Until we get more decisive signals, it would appear best to continue to play the euro on a short term basis in the range up towards $1.0950.

GBP/USD

Sterling appears to have rolled over again as the rally has already run out of steam. Yesterday’s bearish candle has been posted just under the resistance of the 6 week downtrend, whilst momentum indicators are suggesting that this could be another chance to sell for a continuation of the trend lower. Daily momentum indicators are already rolling over, whilst on the hourly chart there is a test of the key near term support band $1.4200/$1.4235 already being seen. This support band acted as levels for the breakout on the recent recovery and is therefore a barometer of how solid the recovery is. Over the last couple of sessions a series of lower highs is again forming on Cable which have left resistance at $1.4305 and $1.4285. A confirmed breach of $1.4200 would re-open the low at $1.4280.

USD/JPY

The volatility continues as the perception of the yen being a safe haven currency of choice drags the pair lower again. The shackles could not quite be broken in the recovery with the resistance around 118.75 still broadly in place and now there has been another change of direction. The daily chart may be showing momentum indicators still positively configured, but the more sensitive hourly chart shows a rolling over which is now building lower highs and is breaching supports. The latest support seemingly broken is at 118.10 which means that the next support comes in around 117.20 which is an old pivot level. I still see this pair as a key signal for market sentiment and the fact that it is turning bearish again is not an especially positive sign for risk again.

Gold

All good things come to those who wait. My impatience seems to have been misplaced on gold as a strong candle yesterday has been followed by further gains today and a breakout above $1112. The bullish bias to the momentum indicators is helping to drag gold higher and support is being left at higher levels. This means that with $1071 as key support now, there are further supports of key near term lows at $1082.50 and $1092.20. The bulls are building strongly now but the lessons of the past few weeks suggest that there is always room for an unwinding correction first, so not to get too overzealous in the chase higher as there could be better entry points. The hourly chart shows strong momentum that is stretched now, with a decent buy zone between $1100/$1109. The base pattern still targets around $1130, with the next band of resistance really not until $1140 area.

WTI Oil

Well, that did not last too long, did it? The short covering rally on WTI from the low at $26.20 had jumped an incredible 25% to its peak yesterday at $32.75, however the sharp run is now itself being retraced. The move in oil looks to be a classic bear market rally with the sellers just waiting once more. Yesterday, with the RSI unwinding back towards the 50 point during the morning, the point that the previous unwinding rallies had reached in November and December, the bears resumed control once more. A move back below $30 which has become a pivot level has subsequently confirmed the selling pressure is likely to retest the lows once again at $26.20. Hourly momentum is again deteriorating and near term indicators suggest that rally has rolled over. A bearish shooting star hourly candle yesterday has left a lower high resistance at $31.75 as rallies are now seen as a chance to sell. There are minor supports around $29.00 and $27.90 but the concern will be a full retracement back to $26.20 once more.